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Halo Collective $HCANF is due to announce its financials on March 31st. I looked at Halo a couple of times in the past, but usually, that was from the perspective of post-earnings. This time, I wanted to get in front of the earnings release because I believe there may be an opportunity present for a long-term investment.
I am going to break down the previous earnings release and I am then going to project a bit into the future. I want to show what Halo could be earning this upcoming earnings release and how that might affect the stock price. That is the opportunity.
For now, HCANF is easing back a little from its recent highs:
Halo Collective HCANF is heading lower after recent highs The recent run-up in stocks is now hemorrhaging all through the streets. Last week’s selling was brutal with some cannabis stocks seeing drops as low as much as 50%. HCANF is no exception.
I expect continued selling in cannabis stocks over the course of the next few weeks and, if you have a few stocks lined up to pick up this could be a good beginning of a long-term position.
Halo Collective Revenues
This is strong revenue growth QoQ for the past three quarters from a relatively low basis Halo Collective came in with robust revenue growth last quarter. If you read some of the tea leaves left at the bottom of the cup, this was not only a surprise for investors but, appears to have been a surprise to management.
I do not intend that to be a bad thing. This was a good surprise. But, Halo needed to line up financing to support their operations with future production. The timing is interesting and this is what I am focusing on. Halo announced its new financing capabilities nearly on the same day they released its latest earnings. What that tells me is that along the way, Halo management realized they would continue to need future financing capabilities to fund operations.
You do not need to go too much further to see that Halo is on track and likely to report record earnings. Just look at the press releases on the company’s website:
Record Sales, Record Sales, Record Sales! Hmmm…. do you think they are going to print record revenues on their next earnings release? As someone who spent some 6-figures to earn a dual major in mathematics and macro-economics, I feel pretty confident that the math adds up.
That would put revenues at ~$10M for the quarter, which would be whopping. I have been covering a few companies lately that have been printing stellar revenue increases. I am not necessarily certain there is a strong correlation between one company’s results and the next. But, overall, government statistics generally are trending higher and Halo would be contributing to these data points.
Halo Collective Gross Margins
Halo Collective Printed Industry-High Gross Margins I cover some 350 cannabis stocks. I compare and contrast industry numbers all day long. The 67.5% printed above is a very high number. My very best picks come in between 60% – 65%; this puts Halo slightly above.
But, is this number repeatable?
I ask this question because I believe in consistency. As a value investor, I have learned to look for consistency. The rationale is simple. If a company consistently prints a metric, such as gross margins, then I can reasonably predict what a company will print in the future based upon this consistency. No one can tell me the numbers above are consistent.
But, then my intuition from econ school kicks in with a concept of economies-of-scale. Previous numbers had outlying factors attached to them such as write-offs on inventory. Those usually go against margins which explains the negative and lower numbers from before. But, with higher volumes come factors of economies-of-scale. By employing certain input variables to maximum efficiency, this improves cost metrics.
If Halo prints outstanding numbers, then its economies-of-scale are also likely to improve margins. This is usually a dynamic equation and it works… up to a certain point. When a company is not performing optimally, such as Halo had not been doing recently, then they are forced to look at every little input variable for producing its products. This same magnifying-glass management push is going to continue to push Kiran, et al., to produce more product at higher levels with optimal cost metrics.
If Halo’s gross margins dropped even 5%, this is not a bad thing. This would put them at average. But, it would be average compared to the best-performing companies out there. I expect +60% gross margins and will use 62.5% as a reasonable metric.
Halo Collective Operating Efficiencies
Halo Collective operating efficiencies were too high relative to total revenue Whereas gross margins were stellar on a comparative basis, operating efficiencies are on the other end of the spectrum. But, this is the result of mathematics and I expect this number to drop on a relative basis.
Total Operating Costs have declined for Halo Collective the past 3 quarters: $6.1M, $5.0M, $4.3M respectively. With increased production, some costs are going to increase. But, things like rent/lease costs remain the same. So, as revenues increase, on a relative basis, costs decline to total operating costs.
If Halo can hit the $10M mark and total operating costs move back up to $5M, this is 50%. That is a solid improvement. But, it is still out of line with my very best picks. The cost metrics of my favorite companies are roughly 27.5% – 32.5%. These are the industry stand-outs. Halo management has a little bit of work to do.
Keep in mind, this is all mathematics. If there are no substantial increases to total costs, and revenues continue to increase, this metric “fixes” itself. I feel confident this is a matter of progress and time will bear this out.
Holo Collective Book Value
Halo Collective Book Value is about the same as the stock price Halo Collective has a book value of ~$0.07 per share. Interestingly, the stock price is almost the same price. Book value is something a value investor would turn to simply to see what is the “worst-case” scenario of the company?
If management felt they had no future prospects they could sell everything off and pay out shareholders. Basically, it is even money. At the current stock price, these prices in absolutely zero future potential.
But, Halo is about to print record revenues. They will likely do so against very high margins. And, on a cost basis, the revenues will have been generated at modestly optimal levels. That is potential.
Halo Collective Could Hit Break-Even
My thinking is that Halo Collective hits break-even for the quarter. They were down a mere $3M last quarter. This would mean that with an increase to $10M on revenues, with gross margins at 62.5%, gross profits will be $6.25M versus the previously printed gross margins of $4.6M. That’s about $1.5M more for management to work with.
That gets net earnings closer to zero. Keep in mind that on a percentage basis, profits improve with economies-of-scale. So, mid-statement, there are improvements that add to the bottom line.
But, there is also momentum as well as the future of Africa’s production. Production in Africa at the Bophelo facility is an interesting resource that will add to the top and bottom line. The idea is with Africa as a production origination point, shipments can move to Malta and then throughout Europe. Cost metrics make the Lesotho, Africa facility lower than producing the same products in the United States or Europe.
There is an approximate $1,000kg of expected cultivation. That is $1.75M in revenues and my bet is the margins will end up being better than the United States merely because of the fact that everything about Africa is less expensive on a relative basis.
The read is that in 1 year’s time, with all of the momentum, Halo is in a very strong position.
I am thinking Halo hits break-even and this means no more cash dilution A Forward Projection
If we assume that over the next two quarters, Halo merely breaks even with profits, and we assume that the following two quarters there is all of $0.01 EPS, totaling $0.02, then forward future earning metrics push this stock upwards. If we use a 30x – 50x forward earnings multiple, HCANF trades at between $0.60 – $1.00, respectively.
But, this analysis works under two assumptions: Record revenues, which they have already reported via news postings. And, industry-leading margins.
I believe these metrics and this future earnings multiple are modest. If Halo can print about $0.04 per share EPS over the next four quarters, this stock trades at $2.50 by the end of this year.
I also believe all of this begins on March 31st.
Reverse Split
One last thing. I have read a multitude of tweets where individuals are inquiring about a reverse split to prop up the stock price. The idea is to push the stock price up above $1.00 so that Halo qualifies for NASDAQ listing. I see this as being similar to pushing on a string.
While I get some of the advantages, personally, I do not care much about where a stock trades. Instead, I am more interested in the financials. And, I believe that the financials will push the stock above $1.00 all on its own. Management should not be focused on moving the stock price but instead, focused on metrics that will get the company to profitability and consistent revenue growth. Then, like magic, the stock will move above $1.00 all on its own.